The 5 Best Ways to Spend Your Money According to Psychology

How to spend your money to maximize your happiness

When people are asked how satisfied they are with their lives, rich people generally report being a lot happier than their poorer peers. But when rich people are asked how happy they are in the moment, they’re generally no happier than those who are less well off. This implies that money is more likely to make us happy when we think about it than when we use it. Which suggests that we’re not spending it on the right things. So, what do psychologists think we should spend our money on to maximize our happiness?

5. Make a loan payment

Coming in at number 5 is the advice to spend your money on repaying debt. Admittedly, it’s not a fun thing to do, but it’ll help to make your subsequent spending more enjoyable. Research has shown that having debt hanging over your head often contributes towards anxiety and chronic depression, as well as marriage problems and poor job performance.

Not all debt is equally painful. Things like a mortgage on a house or a loan for a business don’t tend to cause people as much distress — in fact, they can even increase well-being — because they’re an investment in a person’s future. It’s the unsecured debt — things like overdrafts, payday loans, utility bills, credit card debt, and personal loans — that make people feel bad. Carrying student debt, for example, has been shown to be almost as important as income when it comes to predicting financial worry and life satisfaction scores.

So, instead of adding to your unhappiness by getting yourself one more thing you don’t need and can’t afford, use the money to pay off some debt, even if it’s just a little bit. It’ll make you feel much better about life.

4. Buy something useful

The next best thing you can spend your money on is useful stuff, like an item of clothing, a plasma TV, or a coffee maker. This may not sound as exciting as taking a balloon trip or learning how to scuba dive — and it isn’t — but research has found that, over a lifetime of use, material things offer more frequent doses of positive emotion than experiential purchases. This is especially true for people on lower incomes who have fewer resources and are more concerned with trying to spend their money wisely than focusing on more indulgent things like self-development or self-expression.

Economists and accountants would also recommend that, when you buy that plasma TV, you don’t bother getting insurance. Extended warranty contracts are much more valuable to the businesses that sell them — indeed, they often make more money off them than they do off the goods that they sell — than they are to you. While they can cost you up to 50% of the product’s initial price, they’re rarely ever needed.

Psychologists suspect that we buy warranties because once we own something, it becomes more precious and more worthy of protection, simply by virtue of being ours; something known as the “endowment effect”. We’re also scared of losses and will do anything we can to avoid suffering the pain of losing something.

However, research shows that we’re wrong about how much pain we will actually feel when we suffer a loss. Not only do we not feel losses as bad as we think we’re going to, but we’re also really good at dodging self-blame, meaning that we will also experience less regret than we think we will if we trip over the dog and put our elbow through the TV screen (clearly, that was the dog’s fault). So, save the money you otherwise would have spent on the warranty, and buy something else instead. Or pay off some debt.

3. Buy an experience

You’ve probably heard this before: buying experiences will make you much happier than buying material things (as long as you can afford and have all the material things you need). At least, in the short term.

So, why do psychologists think that we enjoy experiences more than things? For a start, enjoying an experience enables us to feel like we’re using our time “productively” and accomplishing things, it allows us to check items off our “experiential checklist” and build our “experiential CV”. Also, the experiences that we buy end up more tightly linked to our sense of self than the things that we buy, providing us with stories to tell and memories to cherish.

Another reason is that things tend to bring us happiness when we use them, but less so when we just think about them, whereas experiences bring us happiness in both cases; we both anticipate and remember our experiences more than the stuff that we buy.

Moreover, experiences are less susceptible to negative social comparison or buyer’s remorse than material goods — you may be able to tell whether your neighbor’s car is better than yours, but you can’t really tell whether your wine-tasting trip to Napa Valley was more fun than theirs, and neither can you compare the delights of skiing in Aspen with the thrill of spending a night in the Ice Hotel.

We also tend to adapt to things very quickly, whether it’s eating our preferred ice cream, winning the lottery, or living in solitary confinement — so, though you may be very happy when you get your new laptop because it’s so much faster than the old one, after a few days, you won’t really notice anymore, whereas you’ll never forget that time you saw the sun rise over the Grand Canyon.

A final reason why experiences make us happier than things is that experiences are more likely to be shared with other people, and other people tend to be our biggest source of happiness, which brings us nicely to the next point.

2. Give your money away

This may sound somewhat counterintuitive, but a growing body of research is revealing that buying things for other people seems to make us happier than buying things for ourselves, no matter who we are or where we live.

Why is this? Well, human beings are the most social creature on the planet. Few other animals construct social networks as complex as ours, and we’re the only ones whose social networks include unrelated individuals. That said, we tend to feel happiest when we spend money on the people we know the best, and we’re even happier when we can share the experience with them. For example, in one experiment, participants who were given a Starbucks gift card were happier when they spent it on a friend than on themselves, but only when they went to Starbucks with them.

Likewise, when we give to give to charities, we’re happier when we know someone connected with the cause, and happier still when we can see the difference we’re making.

Not only does giving money away make us feel happier, but it may also be good for our hearts and make us physically stronger. Spending money on other people is so rewarding that, even when we’re told to do it, we still feel good about it.

Finally, being generous with our money gives us the opportunity to look virtuous and be judged positively by others, and that always makes us feel good.

1. Buy some time

In this day and age, most of us feel pressed for time. So it probably comes as no surprise to find out that, according to psychologists, the best way you can spend your money is to buy something, or some service, that will save you some time, especially if it’s time that you’d spend doing something you don’t enjoy, like making dinner, doing the grocery shopping, or mowing the lawn. People who spent money on these kinds of things report lower stress levels, better moods, and greater life satisfaction.

Buying things that save time is also good for our relationships. Married couples who buy items or services that enable them to spend time with their partner feel more connected to and supported by a said partner than couples who don’t make time-saving purchases and have less quality time to spend together.

So, if you’ve got some money to spare, get yourself a nice takeaway this week. Better yet, get some extra food and invite that neighbor you’ve been meaning to get to know over. You’ll feel good, they’ll feel good, and everyone’s a winner.

Enjoy this? Become a Medium member today for full access.